Worst month in two years

A sudden escalation in fears of a Spanish bailout have sent Asian sharemarkets into the red as investors dived for safe havens, with Australia’s major index suffering its worst month in two years.

The trigger for the falls yesterday was the unexpected rejection from the European Central Bank of a proposal from the Spanish government to participate in the rescue of troubled bank Bankia.

The Spanish government had proposed a €19 billion recapitalisation by injecting sovereign bonds into the bank’s parent company, which would then be swapped for cash via the ECB.

There are now concerns that the debt-laden Spanish government will not be able to meet the cost of the recapitalisation on its own and become the fourth European Union country to require a bailout.

“The one thing you have to look at is we’ve got risk priced at very extreme levels," Ausbil Dexia chief executive Paul Xiradis said.

“What you’re really up against as a fund manager is do you go with the flow and go for safety, knowing you’re going to get a stampede, or do you take a medium-term view and say these valuations, at levels we haven’t seen in a lifetime, will correct and the opportunity for uplift is enormous. Being defensive is not safe at the moment."

The Spanish news came on top of disappointment from earlier in the week that a rumoured Chinese stimulus package would not be as large as expected, and data released on Wednesday night from the United States which showed home prices close to post-GFC lows.

The S&P/ASX 200 fell more than 50 points at the open on Thursday but managed a small recovery during the day, closing 0.4 per cent down.

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May 2012 has proven the worst month for the benchmark index since May 2010, with a loss of 7.28 per cent.

“The more times this happens, the more frustrated or less confident people are," Whitehaven Private Portfolios portfolio manager Brendan Alford said.

Markets across Asia were in the red in the late afternoon on Thursday, with Japan’s Nikkei down 1.05 per cent, China’s Shanghai Composite down 0.4 per cent and Hong Kong’s Hang Seng down 0.7 per cent.

The increased threat from Spain has come at a time when fears of a Greek exit from the euro zone have lessened, though the latest polls released on Wednesday night showed radical Leftist party Syriza had regained its lead over pro-austerity parties.

Defensive sectors have by far been the most popular for investors in May, with utilities up 15 per cent, followed by telecommunications, consumer staples, and healthcare.

Hastings Diversified Utilities Fund, which invests in energy infrastructure, was the second-best performer on the S&P/ASX 200 in May, up 15 per cent.

“We’ve been taking a bit out of defensives and into some of these other stocks that have been beaten down a bit, like banks and commodities," Mr Alford said.

“If you’re looking for a safe haven, there’s a price for that."

The Australian dollar’s 6.8 per cent fall against the greenback across the month, culminating in a six-month low of US96.76¢ on Thursday, has not given companies exposed to the US dollar the broad-based support you would expect.

Healthcare companies, which benefit from US dollar falls and share defensive characteristics, have been popular.